Where Apple Should Invest Now

In a blog post entitled, "What Apple Must Do at Macworld," Wilcox argues for lower iPhone prices, full disclosure on Steve Jobs's health, a new edition of Mac OS X, an improved iLife suite, and a beefier version of its consumer cloud offering, MobileMe.

It's tempting to comment on the ongoing thread about Jobs' health. Earlier today, he released a letter to Mac addicts in which he insists he'll remain CEO, but admits to suffering from a hormone imbalance that's robbing his body of protein.

Sorry to hear that. Best of luck with your recovery, sir.

Now, with issue No. 1 settled, let's talk about retail. Cox says that Apple shouldn't be working on new iMacs or an improved Apple TV or open more retail stores. "It's time for Apple to think strategic for global economic downturn," Wilcox writes. "That means the company should shift away from costly, margin-sucking hardware and put more emphasis -- at least for the next six months -- on software and services."

A perfectly reasonable idea, but why also stop building stores? They're the first line of support for those who've switched to the Mac, and unlike anything Dell (Nasdaq: DELL) or Hewlett-Packard (NYSE: HPQ) provide today. Apple also has $25 billion in the bank, and it could take advantage of generous lease terms created by deep cutbacks among retailers.

Expanding in a shrinking market would increase risk, to be sure. Fellow retailer Sears Holdings (Nasdaq: SHLD) looks as scary as ever, Talbots faces long odds in its bid for a turnaround, and eBay (Nasdaq: EBAY) is finally coming undone. Most retail forces are bunkering down to weather the economic storm, but Apple is different; it should profit from continued expansion. Here's why.

Where the returns areThe iEmpire has a history of besting the best retailers when it comes to sales per square foot, including jeweler Tiffany (NYSE: TIF) and Apple partner Best Buy (NYSE: BBY) . Here's data from last year at this time:

What's more, we know from its 10-K annual report that Apple generated $1.3 billion in operating income from its retail stores, or roughly $722 per square foot. Taxing that at 40%, higher than Apple's traditional marginal tax rate, leaves $433 in profit per foot of selling space.

This matters because the iEmpire's retail operation is massively profitable already, and could be even more so with better lease terms. Consider Manhattan. One of the world's most expensive property markets, retail space there now rents for $129 a square foot, the Real Estate Board of New York said in a November press release.

To be fair, some Manhattan properties command rents four, five, or more times that average. Apple must be paying even higher rents in some international markets. But most new locations should lease for cheap -- maybe even cheap enough to boost the iEmpire’s already-healthy margins. As CAPS investor turleymuller wrote in an August blog post:

A sizable portion of Apple's capital investment relates to retail store growth. Apple’s stores produce extremely high revenue per square foot, as well as attracting consumers unfamiliar with the Apple brand. Retail stores perform a [marketing] function for Apple due their appeal that generates substantial foot traffic. The stores are also ideal for cross-selling Macs to consumers who have come to purchase an iPhone or iPod. Thus, Apple's retail store strategy has proven to be a very worthwhile investment.

Retail, in other words, is one of the drivers of Apple's extraordinary 22% return on invested capital. Give away that advantage? Forgive me, Mr. Wilcox, if I hope that the iEmpire ignores you on this one.

Apple, Best Buy, and eBay areStock Advisorselections. Best Buy, Dell, and Sears Holdings areInside Valuepicks. The Fool owns shares of Best Buy. Try either of these Foolish services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers had the internal fans on his MacBook Pro replaced at one of his local Apple stores. Thank you, sirs. He had stock and options positions in Apple at the time of publication.

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Nice analysis on the whole. One small distinction regarding store space: It's difficult to compre retail profit:store space across companies like Best Buy and Apple. Most stores - particularly as they approach discount outlets - generate business by customers browsing around and finding good deals. Whereas I suspect most Apple customers have already thought about what they want, perhaps did some homework, and by the time they're at the store they've made their decision. Which is to say that just getting more people in Apple stores won't boost sales the same way that getting most people say a Best Buy would boost sales. Take Starbucks as an extreme example - it's not like people are going to pass an Apple store on a cold day and think "I could really go for an i-pod". But I agree with your conclusion that now's a great time for them to buy retail, given their cash, in order to further increase exposure. It'd be nice to an Apple super bowl ad as well.